How JPMorgan won

0:05Pushkin. Last week, JPMorgan Chase made more than a billion dollars. It did the same thing the week before that, and the week before that, and the week before that. It is hard to think of any company that towers over its industry the way that J.P. Morgan towers over American banking. Today on the show, what is J.P. Morgan's special sauce and how long will it last? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong coming to you from Unhedged World Headquarters in beautiful New York City. and I'm joined today by Josh Franklin, the FT's U.S.

0:53banking editor. Welcome, Josh. Hi, Rob. So let's just talk about what this bank is. I'll start with two statistics that stick out for me. About$2 trillion in deposits. I think I have that right. Interest-bearing deposits here, over$2 trillion in deposits. Total assets,$5 trillion. Just to give a scale of how big this thing is, what else would you add to the description, Josh? No, it's an institution that's bigger than most countries. And if you think of what the modern day J.P. Morgan is, is basically three businesses. You've got the Chase side of the business, which is kind of – it's like the coal room in terms of just like churning along this profit engine.

1:42Yes. And that's kind of the retail deposits, you know, the Chase branches. You've got the JP Morgan investment bank and trading business, which is kind of the glitzier kind of brand enhancing side of the business that, you know, works on the SpaceX IPO. Yes. Has Ken Griffin and Millennium and Citadel as clients. Yeah. And if the retail business is the engine room that just kind of churns along, you know, lends higher than it borrows and just makes money steadily, I guess the Wall Street business, when it's good, it's really good. Right. It has these immense peaks and it has some valleys. But when it's jamming like it's jamming right now, it is just a profit.

2:25When we're in this mode of animal spirits, there's a lot of money to be made. And it really, you know, gives you this nice upside. We'll see how long it lasts for. But right now, you know, people are making hay while the sun shines. And then the kind of smaller business is the asset and wealth management business that they have, which is about 20 % of profits. And that's kind of this money management business that, you know, doesn't move the needle every quarter. but it's also another kind of growth industry that, you know, J.P. Morgan wants to be a part of. Yeah. I mean, I would think, you know, someone was saying to me the other day that we're having the wealthiest cohort of retirees in the history of the world that are kind of hitting retirement right now.

3:09And J.P. Morgan wants to be at the middle of that wave. And it seems like they are. Yeah. No, exactly. And the funny thing is on the asset and wealth side of business, For almost any other company, the money that it puts up every quarter would be a standout performer size-wise. But in J.P. Morgan, because it is so big, it almost gets obscured a little bit by these two other huge businesses. So let's go back now and talk about how did we get here? How did it – it wasn't always the case that J.P. Morgan was the most dominant bank in the United States and possibly the world. How did we get here? So the key protagonist of the story is Jamie Dimon, who's the CEO for a person who's familiar to a lot of listeners.

3:51He takes over J.P. Morgan in the start of 2006. And at that time, we call these guys forever CEOs for a reason. They stick around for a long time. When he took over, there were actually a few bigger banks than J.P. Morgan. You had Bank of America and Citigroup, and Dimon had previously worked at Citigroup under his mentor, Sandy Weil, were both bigger than JP Morgan. But of course, 2006 is a momentous year because the next year is 2007. Yes. And we all know what happens then. Yes. Right? Then there's the early signs of this brewing financial crisis that comes to a head in 2008. And JP Morgan really maneuvers that better than anyone else.

4:36Jamie Dimon manages to sidestep the worst of the mortgage crisis for JP Morgan. And then not only emerges in decent financial health, but also takes advantage of the crisis to opportunistically buy a couple of companies. Let's take those one at a time, maneuvering the mortgage stuff. Was it as simple as just owning less crap than the other banks owned, right? Was there less poison on the balance sheet than maybe at Citibank or Bank of America? Yes. And I think Diamond, he always talks about, A, this fortress balance sheet. So it's like whatever we're doing, we have to have enough financial solidity in our business to be able to withstand any kind of crisis.

5:21And yeah, and I think they were earlier than others in terms of not waiting for the music to stop in terms of preparing for what could happen. And so that meant that when the US government was looking for healthier institutions to absorb some of the less healthy institutions, J.P. Morgan was a kind of credible buyer in that circumstance. And who did they buy? So they bought first Bear Stearns back in 2008, about six months before the collapse of Lehman Brothers. They got a government-backed deal for Bear Stearns, which Diamond has talked about the headaches that it caused because there were lawsuits and they ended up having to renegotiate the deal.

6:01But it ended up being a pretty good transaction for JP Morgan and really helped accelerate its Wall Street business. Yes. We have to look back on that as a good buy. You know, I remember, too, Jamie Dimon talking about how he talks about it slightly like he was doing the world a favor by buying this business. But the fact is now there's this incredible Wall Street investment banking and trading franchise that would not be the same without that Bear Stearns. No. You know, it was a cornerstone deal for that side of the business. and stopped it having to buy something else in the future, potentially, if you're going to want to compete head-to-head with the big investment banks like Goldman Sachs and Morgan Stanley.

6:43And meanwhile, Citibank is over there selling stuff, right? They had to sell their very good wealth management business, right? You had Smith Barney, which Citigroup ended up selling to Morgan Stanley, which shareholders have really rewarded it for. And before we close out on the crisis, what happened to Bank of America? What do we need to remember about that big rival? So actually, it's an interesting point because of all the institutions that could have built a similar machine to what Jamie Dimon built. Bank of America is the one because in the crisis, they buy Merrill Lynch, which is another big storied investment bank and brokerage house.

7:20Yes. And for whatever reason, they just haven't been able to make it fit together to build this business that's thriving on both Wall Street and Main Street in the same way that JP Morgan has done. And then the other big thing that J.P. Morgan did during the crisis was by Washington Mutual, which is another big deposit-taking institution that just kind of added to its kind of growth on that side of the house. Okay. Now I want to disrespect the linear timeline here by hitting a massive fast forward button because things seem to have accelerated since the COVID crisis. And JP Morgan has really increased its lead over the Citibank's, the Bank of America's, the Wells Fargo's of the world.

8:07How did that happen? Yeah. So the 2010s, it's like good, but not great decade for banking generally. And same for JP Morgan. Diamond has a few missteps, most notably the London whale where JP Morgan lost$6 billion over in its trading business. But that's not job threatening for him in the end or anything like that. But it's not a period of rapid growth. And to your point, things start to accelerate a lot for JP Morgan starting in 2022. And that's when we see interest rates start increasing a lot. Just to put it in context in terms of this crazy growth over the last four and a half years or so that JP Morgan has had.

8:49On the day the Fed started lifting interest rates in March of 2022, JP Morgan's market cap was about$350 billion. Bank of America, which is the number two bank in size, was$280 billion. So about a$70 billion gap. Today, the gap between those two is about$500 billion. So JP Morgan's worth over$900 billion. It's going to start knocking on the door pretty soon, probably, of a trillion dollars. Bank of America is down at 430. Now, I love this story because I remember before rates rose, I remember I was writing columns about this, that Bank of America and JP Morgan made very different choices. because in the zero interest rate period and the low interest rate period, especially after COVID when rates were still low, inflation hadn't sparked yet, everybody got these tremendous amounts of deposits into the business.

9:44The government was printing money, et cetera, et cetera. And Bank of America and J.P. Morgan did different things with the money. Can you just talk listeners through that? Yeah. Yeah, and Bank of America took the decision, okay, we've got all these cheap deposits. Let's deploy them in longer-yielding assets, longer-duration assets, which have a higher yield. Yes. And we can improve our margins that way. JP Morgan didn't do that to nearly the same extent as Bank of America did. And people would ask them, analysts would ask them, why aren't you doing this? Yes, right. And it was not an easy decision.

10:19So we're talking about basically buying like 10 and 30 year treasury, stuff like that, mortgage backed securities of long duration. And so you take a deposit, you're paying, I don't know, half a percent poor at the time, probably on average. And you buy a piece of 20 year paper at what was it? Two and a half percent, three percent at the time. And that's a spread of a couple of percentage points. And it looks like easy money. Yeah. You can see why Bank of America might be tempted. Yeah. And it was for a long time. and then rates start going up. And then not only do rates start going up in 2022, but they start going up a lot faster than people were expecting.

10:56This was the whole, you know, inflation's transitory argument and everything like that, which we remember well. Yeah, exactly. And so when that happened, Bank of America had a lot of securities that on paper were worth less. Yeah. If they wanted to sell them. Just for listeners sake, if you have a bond that has a very long duration and it's a 2.5 % yielder and interest rates go to 5%, right? The value of that bond has to fall to make the yield equivalent to the yield on a newly issued security at 5%. So the value of the stuff sitting on Bank of America's balance sheet really plummets. Huge losses, hundreds of billions of dollars.

11:38On paper. On paper. They don't have to realize those losses and whatever, you know. But on paper, it was one of the biggest losses in the history of Wall Street. It was over$100 billion. But it meant that it was a drag on Bank of America's earnings for a long time. Whereas J.P. Morgan was in a position where they could deploy all these deposits that they had into higher yielding assets and really boost their margins. Okay. So here is – this leads us directly to an interesting question. Is the key to J.P. Morgan's success its excellent choice of rivals? I think that is a huge part of the story.

12:15I mean, better to be lucky than good in some ways. And Jamie Dimon and JP Morgan have been blessed with rivals who couldn't get out of their own way. So you had the Bank of America example where they make this really catastrophic decision on the balance sheet when interest rates were low. You have Citigroup that is this huge, sprawling global institution with banking licenses in all of these jurisdictions all over the world. hasn't been able to make it work, underinvested in technology and operations. Undersized retail business. It doesn't have the JP Morgan engine room. Exactly. As you described it.

12:52Hasn't been able to grow in US retail banking, which is one of the best markets in the world to be an at-scale retail banking player. And then had these huge operational issues that lumbered it with consent orders and regulatory hell for, which they're still just getting out of. Speaking of regulatory hell, Wells Fargo. Wells Fargo, a bank that during the 2010s looked like it was doing pretty well, growing a lot. And then it turned out that a lot of that growth was based on selling products to people without their knowledge, which left them - The regulators don't like that kind of thing. No, no, no.

13:25And they've cycled through a few CEOs and they have had to deal with this asset cap that they've only just had lifted, which basically limited their ability to grow. So you have all these rivals that have, to varying degrees, have not been able to get out of their own way and left a clearer lane for JP Morgan to really be the solid bank. And when you're solid in a field of rivals that are stumbling, you look fantastic as a result. I think if you're giving JP Morgan credit, the fact that all of these rivals have had issues like this, whether or not that's financial decision-making, operational decision-making, compliance decision-making, it does show how hard these big institutions are to run.

14:06So you could say it's a feather in J.P. Morgan's cap that they've managed to avoid the worst of this stuff. But certainly the fact that there isn't one credible universal banking rival that hasn't had some form of major blunder over the last 10 or 15 years does, I think, go quite a long way in terms of explaining why J.P. Morgan has become such a dominant player in the industry. A company on its own at the peak of the industry. Yeah. Well, there is one open question that we haven't discussed, which is, can JP Morgan keep it going? So this is the huge question on Wall Street. And ultimately, the big question that overhangs JP Morgan is what comes after Jamie Dimon.

14:52And I think part of it is the machine that JP Morgan has built. It is such a money-making juggernaut that whoever takes over is going to inherit this billion-dollar-a-week profit engine. But at a certain point, you know, two years down the line, three years down the line, five years down the line, the screws on the machine start coming a little bit loose. You know, you've got to update some parts. And so that's the question of who could possibly follow this guy who's such a huge, huge figure. And he is 70 years old. He's talked about, you know, staying on for, you know, maybe three more years.

15:29After that, he wants to stick around as executive chair for a time. So even after he hands over the CEO role, he's going to stick around upstairs in the boardroom, which you could argue is going to make life interesting for whoever does get the job. I mean, the joke is that the most dangerous job on Wall Street is being Jamie Dimon's successor. Yes, because the second people think who your replacement could be, you start to look replaceable yourself. And the magic trick that a lot of these corporate leaders play is that they are the key men of these big institutions. So from that point of view of like who is in the dangerous hot seats right now, it's these two gentlemen, Doug Petno, Troy Rohrbaugh.

16:08Petno is an investment banker. Rohrbaugh is a trader. And they're kind of in this head to head race right now to be the next CEO of JP Morgan. We'll be right back with Long and Short.

16:36Welcome back. This is Long and Short, which is the part of the show where we go long things we like and short things we don't like. Josh, do you like something or not like something you'd like to talk about today? I'm going to be long power trips. So I've been casting around looking for weird and unusual uses of AI on Wall Street and in investment banking. And I've just started here. everyone loves to have someone they can talk down to in this industry. And I've just been hearing people kind of berating their AI model. This is often juniors. They're kind of getting this power trip if they think that the AI has told them something wrong.

17:14They'll be like... And like, you know, AI doesn't sue you. AI doesn't call HR. No, no. And from what I hear, it's kind of giving people this weird power trip over their AI models. This is the future. I'm going to be short the Magnificent Seven. This is a short-term trade idea. Last night, Google reported excellent revenues and massive spending. The stock's getting beat up a little bit. I just feel like we're not comfortable with these monstrous tech companies right now. They've been going sideways for two months. I think there's more sideways in their future. We haven't resolved this question of revenue versus spending at these guys.

17:56So for me, I feel it's choppy water from here on out. It will not be choppy water when we are back in your feeds, listeners, on Tuesday. Until then, stay cool. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Special thanks to Laura Clark, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

18:54We'll be right back.